Roswell, GA · Member since 2013 · 7 posts · 0 votes
I had to relocate to Chicago from ATL for my job and hired a property MGT company to assist with renting out my home in ATL. We found a tenant who owns his own company, wants to pay in advance with 3 month increments (from his companies checkbook) and wants a "first right of refusal" if we decide we want to sell the house in the future. He also wants to sign a three year contract. The language my property mgr put in the contact is below. We have not signed this contract yet.
I feel like there are some angles here where I could get screwed. Open to all pessimistic scenarios!
During the term of the lease, and any extensions thereof, "Resident" has the first-right-of-refusal to purchase "Property". "Resident" has the right to purchase "Property" at the same price and terms as provided to the "Property" owner in a bona fide offer from a 3rd party. The 3rd party offer must be acceptable to the owner's, in the owner's sole discretion. "Resident" has 36 hours, after being notified, to match the 3rd party offer with a bona fide offer of equal or greater value and terms. If "Resident" does not deliver a bona fide offer to purchase the "Property" at equal or greater value and terms within 36 hours, "Property" owner has the right accept the 3rd party offer with no other obligation to "Resident" concerning the purchase of "Property"
Investor · Newport Beach, CA · Member since 2012 · 129 posts · 102 votes
12y
Never give a right of first refusal. I usually deal in bigger deals than houses and I can tell you that where the deal is large enough to merit the involvement of serious lawyers, this is one of the most heavily negotiated provisions. It can go on for pages, and there is a good reason for this -- it has huge potential to go wrong.
For example, say you have an offer at $250k which you think is very generous, but the market is moving quickly and you want to strike while iron is hot. You give to tenant, and 36 hours later he accepts. So you have to tell strong buyer to go away. Same with person that was in 2nd position, 3rd position, etc. Now suppose the original offer had a 20 day inspection contingency period and a 30 day financing contingency. So that means for 20 or 30 days, you don't know if your tenant is going to perform. Say he pulls the plug on day 30 and you have to give deposit back, as per terms of original offer. Now what? You take back to your former bidders and hope that a month later they are still interested? Will they pay the same price? Or do you re-market? And then if they come in lower, do you have to offer to tenant all over again? Essentially my view is that giving a ROFR is giving someone the power to kill your deal.
If a tenant wants the right to buy, most I will give them is a right of first offer. Before I take to market, I tell them at what price and terms under which I intend to market the property. They have right to make an offer at this price and terms, which I must accept. However, if they refuse, their rights terminate. I have right to take to market and make deal, even if deal is less favorable than the price/terms I offered tenant. And even that I would not give unless absolutely necessary.
This is not legal advice, just wisdom gained from years of deals.
Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
12y
that language sounds pretty solid to me. basically you get to put the property on the market and solicit offers. Once you find one (price and terms) you like then the tenant has 36 hours to match the exact offer.
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
12y
Something like that I would think really you want an attorney to look over and make suggestions so you will be protected.
Your house I assume you are an accidental landlord that had to move. Selling season is coming up. Are you underwater in value on your property?? By how much??
Is this a high end home?? If so and the tenant trashes it you could have a bunch of money to make it sale ready again. A lot really depends on your credit and how much upside down if any you are on this property.
3 years is along time commitment.
You really need to take this slow and go over all angles before deciding what to do.
Real Estate Investor · Chicago, IL · Member since 2008 · 1k+ posts · 218 votes
12y
First let me say @Dustin Caldwelll welcome to Chicago. But hope you deal with snow better than the other "Atlantans" are showing today. We have over 5' of it here. They are freaking out over 1".
The language seems fair, but if you are concerned, why not have an attorney review it to safe!
Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
12y
I would have a lawyer look at it. The thing I would say is if you were to receive an offer the resident could "match" it but might not be in a position to fufill the contract say for example if it has a mortgage contingency but they know they can't by not qualifying for a mortgage so effectively they extend their rental knowing they couldn't buy. Although the terms sound ok otherwise I would want to get it written in a way that protects my ability to sell the property as I see fit. That being said years ago we did give a tenant the right to buy a property we held with a similar clause albeit with no other offer on the table. It really contributed to how well they took care of things and they bought it at a fair value without any relator commission saving us some money.
Naperville, IL · Member since 2014 · 35 posts · 6 votes
12y
Maybe you would want to structure the right of first refusal deal more as a right of first offer (ROFO)? Sounds like tenant is getting a good deal: 3 year lease, flexibility in payments. On top of that sounds like a ROFR deal encumbers you if you get a solid deal to sell. You might get a buyer who wants to move fast, has excellent credit, maybe can pay cash... Now with the ROFR you might scare them away since your tenant can match and drag things out.
If you do the ROFO you can simply entertain your tenant's offer and haggle... Before even listing the home. If it works out, great.. Sell. If not, his turn is over, onto another buyer
Investor · Newport Beach, CA · Member since 2012 · 129 posts · 102 votes
12y
Never give a right of first refusal. I usually deal in bigger deals than houses and I can tell you that where the deal is large enough to merit the involvement of serious lawyers, this is one of the most heavily negotiated provisions. It can go on for pages, and there is a good reason for this -- it has huge potential to go wrong.
For example, say you have an offer at $250k which you think is very generous, but the market is moving quickly and you want to strike while iron is hot. You give to tenant, and 36 hours later he accepts. So you have to tell strong buyer to go away. Same with person that was in 2nd position, 3rd position, etc. Now suppose the original offer had a 20 day inspection contingency period and a 30 day financing contingency. So that means for 20 or 30 days, you don't know if your tenant is going to perform. Say he pulls the plug on day 30 and you have to give deposit back, as per terms of original offer. Now what? You take back to your former bidders and hope that a month later they are still interested? Will they pay the same price? Or do you re-market? And then if they come in lower, do you have to offer to tenant all over again? Essentially my view is that giving a ROFR is giving someone the power to kill your deal.
If a tenant wants the right to buy, most I will give them is a right of first offer. Before I take to market, I tell them at what price and terms under which I intend to market the property. They have right to make an offer at this price and terms, which I must accept. However, if they refuse, their rights terminate. I have right to take to market and make deal, even if deal is less favorable than the price/terms I offered tenant. And even that I would not give unless absolutely necessary.
This is not legal advice, just wisdom gained from years of deals.
Americus, GA · Member since 2014 · 22 posts · 18 votes
12y
It sounds like I might be in the minority here, but I think it sounds like a good idea. But there's a big IF here: If the renter has excellent credit. I've found that people offering to pay months in advance do so to cover their credit history. This advice takes into account that I think housing prices will recover and rise over the next 3 years, and if I had someone responsible to rent from me for 3 years, I would take that chance. That also includes me being financially secure where I don't need to get the equity from my home to fund my lifestyle.
I would put an additional clause that the 1st refusal includes everything but the inspection period. And if I did market the house, I would require that any buyer put down a high deposit. It might limit me a bit, but it would also make sure that the renter is not playing games to enter into contracts without any plan of actually buying the property.
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
12y
What's missing? Is this tenant qualified to buy or not - that is what's missing. If qualified to buy, then they should just buy it instead of rent and play with right of first refusal. If not qualified to buy, then what will guarantee that will improve in 3 years or any given time?
Roswell, GA · Member since 2013 · 7 posts · 0 votes
12y
The owner is qualified to buy. Hey owns his own company and has split his time between ATL and Colorado for many years. He is now getting a divorce and needs a house to stay in while he is in ATL. I got the impression that he wanted to rent because he needs something quick (needs to show court he has a good home for his daughter during divorce proceedings). Also he is a CEO so he is extremely busy and implied he didn't have the time to house shop. Credit check, pay stub review and background performed.
Dallas, TX · Member since 2011 · 308 posts · 59 votes
12y
I don't really see what's in it for you. If he was paying above market rent or paying a big amount up front it would make more sense. Paying 3 months up front is not a big deal (how many properly screened tenants stop paying within the first 3 months?) and signing a 3 year lease could be good or bad if rents go up.
Also the fact that he is self employed means it will be difficult for him to get a bank loan...
Roswell, GA · Member since 2013 · 7 posts · 0 votes
12y
I will have positive cash flow each month and currently have positive equity in the home. Also I hope the market continues to improve and allows for a better price in three years to possibly sale. This is what I was thinking as far as the "whats in it for me" aspect.
I will have positive cash flow each month and currently have positive equity in the home. Also I hope the market continues to improve and allows for a better price in three years to possibly sale. This is what I was thinking as far as the "whats in it for me" aspect.
To each his own, but what I am getting at is these are things that are perfectly achievable with a normal tenant in place.
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
12y
You seem to really want to proceed with this, but one thing you did not do is get 2 prior years of tax returns; this is commonly done for those who are self-employed or operating a business for their income. Recent pay stubs can be inflated with bonuses and performance payments, but what does the income look like on average is more important; bonuses don't always happen.
Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
12y
Counter with you can rent but not with a right of first refusal. If that is a deal breaker, find a new tenant. This will only go bad for you. I've only seen these types of deals benefit the one that has the right not the owner.
BTW I don't think he will move on if he's as busy as you say. He doesn't have time to look to buy so he doesn't have time to look to rent. Have the PM remind him that is locked in for 3 years so he doesn't have to worry about you selling it out from under him. Even if you sell the lease stays with the property. The tenant might not realize this and wants to protect his lease.
As far as quality of tenant. Remember the wife is probably getting half and if she has a good lawyer she is getting the good half. He might not be so qualified after paying her off.
Residential Real Estate Agent · Broomfield, CO · Member since 2013 · 390 posts · 125 votes
12y
@Dustin Caldwelll You've gotten some good points to think about above. For the reasons spelled out by Leonard I might be inclined to go with the ROFO. As to the language given, I don't see any glaring problems, except that the first "owner's" should be "owner" or "owners".
I hope your manager is an attorney, otherwise s/he is practicing without a license. I'm NOT giving you legal advice, and you should run this past an attorney licensed in your state.
Real Estate Investor · Houston, TX · Member since 2013 · 30 posts · 13 votes
12y
@Leonard L. perspective seems very valid. ROFR definitely isn't a positive, but if there are enough other positives of the deal for you to compensate for this negative I wouldn't think it should be a deal breaker. Another huge question is whether you have any intention of selling within the next 3 yrs. If you are planning on holding the house indefinitely then this might be a non-issue. On the other hand if you planned on getting out of the investment within the next couple yrs. this is a much bigger concern. A reasonable compromise would be ROFO or restructuring the ROFR to drastically expedite his option and inspection time-frame as well as to require earnest money in conjunction with the refusal. I don't know if this is possible, but I don't see why it wouldn't be. Regardless, I would definitely consult you attorney before moving forward with anything. These are my personal opinions and is not legal advice.
Roswell, GA · Member since 2013 · 7 posts · 0 votes
12y
Thanks for the input everyone. I think the ROFO is a solid compromise and allows both parties to be more comfortable. I also liked the congruent message that an attorney needs to review. Will do this. I plan to hold the house for a minimum of three years. If this were not the case then I don't think I would opt for the ROFR and the ROFO would probably push my comfort level. Thanks again everyone and please keep the conversation going. I am learning a lot.
Rental Property Investor · Morgan Hill, CA · Member since 2012 · 212 posts · 64 votes
12y
The tenant would need to pony up with a cash offer within 18 hours of notification with a non-refundable deposit. Cash because of all the contingencies mentioned above and within 18 hours because most of what I have seen requires a 24 hr response to an offer. I'm not saying this is realistic, but it is reasonable to not affect your ability to sell to others.
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
12y
If you do this, make sure this right if refusal has an expiration, because you don't want it to continue in perpetuity. And make sure that there is some set of criteria that would be a default that voids the right. This is something like an option.
Think of things like failure to pay rent or other fees that are due; what if tenant moves out; tenant damages property.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y
I'm posting to "mark" this thread in my posts.
I wouldn't give that FROF, it lacks details.
Basically, you need a contract that becomes effective at or above, a stated amount and the other offer made first becomes an active but back up contract.
Yes, you don't contract unless they are qualified.
First issue I saw was the notice. How is notice given? What prevents the tenant from claiming notice wasn't given and files to clog your deal?
36 hours is rather short, the tenant could be out of town for 2 days and never get the notice.
How do you show you have a bona fide first offer? Showing the owner isn't just trying to force a sale today rather than later on.
The agreements will have a closing date like 30/45 days, subject to financing if it's required and clear title, from the date of acceptance.
Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
12y
@Dustin Caldwelll For some reason I seem to be playing devils advocate a lot lately. I think the ROFR is a pretty good compromise. If this guy is getting a divorce he needs to show stability. The longer he stays in one home the more stable he looks. This clause allows him to ensure he can stay for 3 years and possibly buy. The drawback to you is if you decide to sell the house you have to wait at least 72 hours before accepting an offer after you send him notice. Normally 72 hours is the max you have to accept an offer or it is deemed withdrawn. I have seen ROFR really hurt the ability to sell a property but they were much longer. One was a 30 day. you can imagine how it made it impossibly to get folks to offer. I have seen some 10 day ones, but 72 hours is dam short for a ROFR,
A couple of drawbacks. Currently you must reside in a house for 2 of the last 5 years to claim the tax exemption. With the 3 year lease you will lose that exemption. If you are considering selling the property you should do so by the end of the second year or it will be considered income and you will have long term capital gains.
The ROFR needs to be limited to the 3 years of the lease. The 2 of you can always agree to sell during the lease if he is really interested. It would be nice if he waived any inspection period, since he will have lived there for years, and require some reasonable non refundable earnest money in order to hold it if he accepts the offer, say 1% or 2%. That is not a huge amount but would fairly compensate you for the trouble if he backed out. Remove any financing contingency as well. You can set the notice periods however you two agree, like by phone with his number listed, or 3 days after calling and posting a notice on his door, etc.
My personal preference if I was selling would be to allow the ROFR, make the lease for 2 years with option to renew if you decide not to sell. Put in reasonable notice and earnest money terms. Add a clause he takes it without any inspection period. You might want to include reasonable yearly rent increases.
I think you have a great opportunity. Folks who are considering buying usually take better care of the property. I would normally say to vette the guy thoroughly, but it appears you have done so. Good luck
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y
Thanks Jerry, great coverage.
From what Jerry mentioned, you'll need to contract the deal when the tenant says "I'll take it".
I'll bet Jerry's form can act as the purchase agreement, guessing.
We use a FROR modified from a PA. Terms are excluded that are not applicable, such as inspections, however, a tenant/buyer may still want a mechanical inspection, just because it works doesn't mean there are defects. A pest inspection will probably be required, so time and contingencies for repairs may need to be addressed.
As a seller, you really need to play it by ear. You can always modify an agreement as you go, but it might be better to describe the details to hold the deal together.
Take the wood destroying insect inspection, mention as required here, it may be irrelevant, but a buyer won't be aware of infestation or damage. This will be an issue with any buyer, if it's not addressed as to who covers damages up to a certain amount the buyer may avoid the obligation and they are usually going to get their money back from any down payment.
Another issue I cover is insurance, because I've been through insured losses during the contract period, rare, but it happens. Another point of decision, do I accept insurance proceeds and continue with the buy or do we avoid the deal and get the money back.
Speaking of getting money back, a down payment may be driven by local custom more than your agreement (especially if the seller drafted the agreement) so saying non-refundable may or may not work.
Jerry has a very good point ( I think he was making) that 1 or 2% be charged as the fee for the ROFR and it being applied to the sale price or not. It can be paid out of closing as well. Calling it a fee for the FROR places it outside the customary requirements to refund deposits.
Selling, I like doing away with financing contingencies, in reality you can extend as needed for financing contingencies, some repair being required for example. Most buyers, obviously, will be financing and it would be nuts to terminate a deal with your buyer that will most likely arise again. Extensions for title requirements may be out of your control and will be an issue for any buyer.
Notice can follow the same notice required for eviction, posting to a door, but excluding the day of the month requirement. IMO, 72 hours is sufficient for a decision from both sides. I've done one week as it gives time for inspections required if necessary. As John R. mentioned you should know if you're putting it on the market, simple communication as a heads up takes care of time for a buyer to get things done as well.
If you get an offer and you have a FROR in effect, you can accept that offer subject to the FROR keeping it in play as a back up contract. The other buyer can walk, but at least they see they can get the deal. Have them accept that counter-offer and show them the time line agreed when the FROR terminates.
Contracts are the glue that hold deals together, they don't weld either party to the table. In my years here on BP I've seen that investors favor short contracts, they like simple they say. Such are like tying a pit bull with a cotton clothes line rope, if he wants to get away he can. The reason they are favored is because the investor can't explain the longer contract, as the longer version can be beneficial to the investor as a buyer or seller. I can run through a 9 page contract in 15 minutes and take a few questions, I just don't buy it that you can't spend 15 or 20 minutes on executing a contract. I've said before I don't like some spiel or canned presentation, this is an exception. Know the contract, practice a presentation of the agreement to present the terms, say exactly the same thing every time, things will go quicker and if anyone claims you said one thing, you can repeat exactly what you said, when most people hear that, they come to reality. Get a good FROR and learn it. :)
